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Opening a Business in California: Business Leases.One of the most important decisions you will make as a business person is choosing the proper business location. Some of the factors to consider are a matter of common sense. It is important to have a business location that is appropriate for the business, easy for one’s customers to get to, and within one’s price range.
However, equally important are the terms of one’s lease – that is, the contract between the tenant and the landlord. You must choose between a short term or long term lease. You must consider an option to renew the lease at the end of its term. You must negotiate the terms of renovation of the rented space, if any renovation is necessary. You must consider issues like the right to sublease, the acceptable uses for the premises, and a myriad of other issues addressed by the lease.
Too many clients merely sign the lease given to them by the landlord without either reading it or negotiating over some of its terms. This can turn out to be very disadvantageous and even fatal to your business if you are not careful.
Below I address a few of the most important issues to consider when choosing a location and negotiating a lease.
Short-term vs. Long-term leases.
The length of leases vary greatly; they can be as short as one month or as long as ten years.
The simplest, shortest alternative is the month-to-month lease. Often these short-term leases are not even reduced to writing. Oral leases are dangerous because they lead to disputes by not specifying the terms of the relationship between the landlord and the tenant, and the terms of the tenant’s use of the property. All leases should be written, even month-to-month leases. The month-to-month lease gives the tenant flexibility and the option to choose another location or renegotiate the terms, if it doesn’t work out. Conversely, the problem with month-to-month leases it that it subjects to the tenant to raises in the rent and even eviction at the whim of the landlord. If you are going to be investing time and money in promoting your business at a certain location, short-term leases are very risky in that much of this investment can be lost if the landlord chooses to evict you. A long-term lease offers you the protection that your investment in time and money will not be lost in this way.
If circumstances allow, some businesses will try to sign long-term leases when the rental market is weak – meaning rental rates are low, and avoid signing such leases when the rates are high. In downtown San Francisco, for example, the rates for high-end commercial offices can vary from $2 to $5 per square foot, depending upon the current rental market.
Renovations and Signage.
One item that it also subject to negotiation in a lease is who will cover all necessary modifications of the rental space. If the space you are renting will require renovation, then you can attempt to get the landlord to cover some or all of these costs. In any case, the lease should state what improvements are to be allowed by the landlord and who will pay for improvements. If you are intending to make improvements to the space, it is best to have the written permission of the landlord in the lease.
Another related issue is what signage the landlord will allow. Again, the need for signs for your business can differ greatly depending upon the type of business involved. Make sure the lease provides for your right to post whatever signage you need for your business. It is a good idea to specify the size permissible and even include a drawing or representation as an exhibit so as to avoid any disputes later about what is allowed.
Option to renew or expand.
Another item for negotiation is whether the lease includes an option for the tenant to renew the lease and on what terms. If there is a chance you will be expanding the business, you may also wish to negotiate an option to lease any adjoining or additional space in the building. Often times a landlord will agree to promise you a “right of first refusal”.
It is almost always required by landlords that tenants to carry liability insurance – that is, insurance to cover injuries suffered by customers and other visitors on the premises. But the amount is negotiable. Typically you will want to have insurance protecting your business anyway and the landlord can be added as an “additional insured” at no additional cost.
Acceptable uses of the property.
The standard lease should set forth the accepted uses that can be made of the rental space. This must clearly allow all required activities of your business and any that may be necessary in the foreseeable future. A preliminary question is whether zoning laws permit your business at this location and this, of course, should be determined at the start. But you should also make the language of the lease pertaining to allowable uses of the premises to be as broad as possible.
The standard landlord’s lease restricts a tenant’s ability to sublet space. If you intend to sublet part of your rental space, you should make this explicit in the lease. You should try to negotiate language that removes all restrictions on the right to sublet space. At a minimum, a landlord’s right to reject your subtenants should be limited by a clause stating that approval of subtenants “must not be unreasonably withheld”.
I strongly recommend that you include an arbitration clause in your lease. If you do have a dispute with your landlord, the last thing you want is a long, expensive court case. Arbitration is a procedure whereby disputes are resolved out of court, by an arbitrator who acts as a judge. This is usually faster, cheaper and less stressful than a court case. The lease should call for disputes to be resolved by arbitration with one arbitrator selected by the American Arbitration Association or similar organization.
Most business owners are often so consumed in the preparation to open a business that they ignore the details of their lease. Often they feel helpless to try to negotiate over their landlord’s standard lease. Do not hesitate to assert your interests in your dealings you’re your landlord, right from the beginning. Knowing the key lease terms and their importance to your business is the first step to getting the type of lease provisions that will help, not inhibit, your business success.